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December & FIIs – Solving the myth

Dec 13, 2000

Where is the Sensex heading? This is the big question that has been debated on either way. Some say that markets would go down, as Foreign Institutional Investors (FIIs) usually turn sellers in December on account of their fiscal close. Others believe that markets are on for a northward journey based on valuation parameters. Below we present a brief study on the movement of Sensex in November-December for the last seven years. We have also correlated the Sensex movement with investment trend of FIIs. The results are interesting. As against the general perception, Sensex for the last six years has moved up sharply during this period despite the general consensus about FII sales. The BSE Sensex has been in positive territory for the last six years during December. However, if we consider the trend for both November as well as December for each year, Sensex has moved southwards for four out of the last seven years.

BSE Sensex
One-month trend FY94 FY95 FY96 FY97 FY98 FY99 FY00
1st Dec 4,104 3,038 2,851 3,570 2,804 4,615 4,032
31st Dec* 3,927 3,110 3,085 3,659 3,055 5,006 4,219
change (%) -4.3% 2.4% 8.2% 2.5% 9.0% 8.5% 4.7%
Two-months trend              
1st Nov 4,304 3,489 3,149 3,791 2,811 4,271 3,789
31st Dec* 3,927 3,110 3,085 3,659 3,055 5,006 4,219
change (%) -8.8% -10.8% -2.0% -3.5% 8.7% 17.2% 11.4%
* till 13th December 2000

If we go on to analyse the investment trends during this period of FIIs over a period of time, they have been net investors on the bourses for six out of the last seven years. Why are FIIs bullish on India? There are two reasons. One, India is one of the fastest growing economies in the world (after China and some other South East Asian economies). Two, potential of the Indian market is vast as penetration and consumption levels are much below global levels. Besides, post FY97, with the advent of information technology boom, India has emerged as the single largest supplier of intellectual capital.

Investment trend of FIIs
(Rs bn) FY94 FY95 FY96 FY97 FY98 FY99 FY00
NI in December* 0.5 4.0 4.0 - 5.0 3.0 16.0 0.2
NI for the full year 68.0 39.0 108.0 57.0 - 7.0 67.0 71.0
* Net Investments

So, where is the Sensex heading in the current year? As of now i.e. till 13th December 2000, FIIs have been net buyers on the bourses during December as well as for the full year. Though net investment is the lowest in the past seven years during December, cumulatively (for the year so far), FIIs have invested close to Rs 71 bn (the highest in the last four years).

So now we know that declines in December have little to do with FII selling. Despite the numbers, investors continue to fear that there could be liquidation by some funds. This has created a sort of resistance in the markets. But now that you know the facts, the next time someone tells you to sell stocks on the pretext that FIIs will turn sellers during December, you know what to do. Don’t believe him.

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